Retail sales jumped 1.3% in April after hesitating in March. Gains were driven by a snapback in vehicle sales. Consumers have learned to play chicken and wait for producers to sweeten a purchase with incentives, which were even better in April. Retail sales rose 0.8% excluding vehicles, which was still strong, especially given the upward revisions to March. Consumers spent on furniture, electronics and food at home as they nested a bit more instead of stepping out.
The shift in spending from bricks to clicks, or online, continued as online sales accelerated in April. We also saw niche retailers do well, as some spending on clothing came back. Year-over-year gains in clothing, however, remain weak, reflecting heavy discounting and a shift away from clothing purchases.
Separately, the preliminary data on inflation in April edged up. The producer price index (PPI) final demand rose 0.2%, with increases more broad-based than we have seen in recent months. Energy prices rose, while prices for food fell. The real issue for the Federal Reserve is consumer inflation. We will see that data next week; we expect it to look a little warmer on higher prices at the gas pump. A key category to watch is also medical costs, which surged at the start of the year. Prescription drug prices are expected to remain elevated. Higher copayments and deductibles, however, should be squeezing spending and price increases on medical services.
Bottom Line: The consumer is up and still running. The rebound in growth in the second quarter looks solid. This, coupled with a warming trend in inflation, will allow Fed officials to feel more comfortable with another rate hike. We are coming down to the wire on June, despite what seems to be a shift among doves to favor some kind of rate hike. I think the Fed should move in June, but probably cannot, given the shock that would be to markets. It would take a Herculean effort to get markets there by the June meeting, so the best bet at this point in time is that the Fed punts, but finally hits the reset button on market expectations with the economic assessments, which Chair Janet Yellen can take time to better explain during the press conference after the meeting. It would be a move forward for the Fed to hold press conferences after every meeting so that market participants would embrace the idea that every meeting is really live when it come to policy decisions.